Bank of America's semiconductor analyst Vivek Arya has cautioned that the recent selloff in chip stocks may not be over, projecting another 10% decline for the PHLX Semiconductor Index. In a research note to clients on Monday, Arya attributed the potential drop to overcrowded portfolio positioning colliding with macroeconomic pressures, rather than any fundamental deterioration in the sector.
The warning comes as chip stocks have already fallen over the past two months, with the index now trading at roughly 20 times forward earnings—a level that aligns with the broader S&P 500. This parity erases the valuation premium that had built up during the AI-driven rally, when chip multiples reached a 15% premium over the S&P 500 before retreating.
Overcrowded positioning and macro headwinds
Arya highlighted that chip stocks are currently 13% overweight relative to the S&P 500, leaving the group vulnerable to forced selling if sentiment shifts. He also pointed to elevated interest rates, emerging backlash against data-center expansion, and complex circular financing arrangements among AI infrastructure players as compounding pressures that could complete a valuation reset.
Despite these near-term risks, the analyst recommends treating any further decline as a buying opportunity rather than a signal to exit. He notes that companies within the semiconductor index are expanding forward earnings per share at a compound annual growth rate of roughly 70%, making the current 20x forward multiple appear "cheap" relative to that growth pace. Seasonal trading patterns also tend to turn bullish heading into year-end, he added.
Buy-the-dip stance with enhanced buy ratings
BofA has assigned "enhanced buy" ratings to eight names: Nvidia, Marvell, Micron, Lam Research, AMD, Intel, Analog Devices, and ON Semiconductor. Catalysts are already in motion, including Marvell's accelerated rollout of custom AI chips and Nvidia's quarterly earnings report due after Wednesday's close. BofA flags risks from slowing capital-return plans and uneven enterprise demand, which could trigger further momentum selling in the near term.
The tension between crowded short-term positioning and durable secular earnings growth sets up a pivotal test as investors await Nvidia's results. A pullback tied to softer capital-return guidance could lead to additional selling, but the return of chip valuations to historical parity has already removed much of the speculative excess.
Looking ahead, execution on custom silicon programs is likely to separate winners from laggards. Specialized suppliers such as Marvell are positioned to gain market share even as enterprise spending remains uneven. Rather than signaling a structural break in AI capital expenditure, a further 10% reset would simply realign stock multiples with underlying earnings growth, potentially clearing the runway for a rebound into year-end.
Investors have been trimming exposure ahead of Nvidia's earnings, as seen in recent market moves. Meanwhile, broader market volatility has also weighed on tech stocks, with the S&P 500 heading for a weekly drop. For those considering entry points, the current environment may offer opportunities, but caution is advised given the near-term downside risk.
This article is for informational purposes only and does not constitute financial advice.
